What market breadth indicators tell us, but also what they don’t tell us.

The New York Stock Exchange (NYSE) Advancing/ Declining issues (A/D) , in short NYAD is a much followed breadth/liquidity indicator. It is often touted that as long as it makes new uptrend (or even ATHs) there’s no reason of concern, while only negative divergences over longer time frames (weeks to months) foretell of larger corrections as than less and less stocks are participating in the index’ actual advance. A thorough review of the NAYD has been provided by Mr. Randazzo, CMT. See here.

When we look at the weekly chart of the NYAD we can see, significant, corrections can occur without negative divergences (red boxes) such as in 2009 (-9%), 2010 (-17%), 2011 (-22%), 2012 (-11%, -9%), 2013 (-7.6%), 2014 (-10%), 2016 (-6%, -5%) and 2018 (-12%). Yes, in all cases the markets went on to make new highs, but several corrections are highly trade-able from a short/inverse ETF/(protective) put perspective. And many shorter-term traders and investors would not like to sit through 10-20% draw downs, while many will even get scared out of the market. Thus as Mr Randazzo concluded, among other observations: ” The low-interest rate environment accompanying much of the current bull market, along with the increasing population of interest-rate-sensitive securities in the NYAD, appears to have made the A/D-Line more susceptible to shorter, corrective divergences as well as positive divergences. This observation supports the increased use of complimentary market breadth indicators in the evaluation of each new NYAD Line divergence.“

Weekly NYAD chart since March 2009 low

So what other tools do we have to our disposal? One is the TICK. What is TICK? “Each individual move from one stock trade to another. … The NYSE TICK indicator shows the net of all UP-TICKs minus all DOWN-TICKs on the NYSE exchange at a given point during the day. ...” Source: here. When we look at the weekly chart of the TICK (see below) it of course only shows the closing TICK of that week: one data point to reflect a whole week. Maybe not as reliable as one would like, but if we use long enough data sets one can start to see patterns and compare apples to apples.

Weekly TICK chart since 1999

With TICK data available since 1999 a few important observations can be made: The general long-term trend is down (as reflected by the declining 233w EMA). Not sure what to make of it. In addition, we can clearly see the large spikes around the March 2009 low continuing into 2010-2011 and during the 2015-2017 rally. Other important lows since the bull in 2009 started, are also evidenced with spikes but none are as large as back then.

But, we can also see there are weeks where the weekly TICK is unable to close above +300. Those are marked by the red rectangles. The last such “gap” was prior to the October 2018 high, before that it was before the 2015 high, etc. All in all there were around eight instances where the weekly TICK for weeks did not close above +300. Six out of those were before significant market tops, albeit these tops were often still weeks to months away. The blue rectangle shows the market is currently (data till last Friday April 12) in such a “dry spell” since the beginning of March.

Combining what we learned from the NYAD in that it is not as robust as it used to be and doesn’t always foretell of sometimes significant market corrections, it appears another correction is looming (can still be weeks away as the historical data shows) especially if the Bulls fail to close the TICK above +300 this week again.

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